Resource‐driven victory

• Author: Mahsa Jahandideh
• DOI: http://doi.org/10.1111/jpet.12463
• Date: 01 August 2020
• Published date: 01 August 2020

J Public Econ Theory. 2020;22:877–898. wileyonlinelibrary.com/journal/jpet © 2020 Wiley Periodicals LLC

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877

Received: 15 April 2018

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Accepted: 17 June 2020

DOI: 10.1111/jpet.12463

ORIGINAL ARTICLE

Resource‐driven victory

Mahsa Jahandideh

Department of Management, Science and

Technology, Amirkabir University of

Technology, Tehran, Iran

Correspondence

Mahsa Jahandideh, Amirkabir University

of Technology, Saeed Alley, Enghelab

Street, Tehran 159163‐4311, Iran.

Email: jahandideh.pe@gmail.com

Abstract

The vast popularity of distributive policies in many re-

source‐rich countries coincided with the oil and gas

price hike of 2004. However, following the sharp de-

cline of price in the late 2014, this popularity started

waning and the tendency toward more productive po-

licies gained traction. Using a theoretical model, this

paper studies the optimal composition of public

spending and demonstrates that, for a sufficiently low

amount of any exogenous revenue, for example, re-

source revenue, investing revenue in productive public

good is preferable. The representative agent prefers

more distributive policies as resource revenue increases.

A key determinant of the optimal composition of public

spending is the inherited level of productivity. Coun-

tries with too low or too high productivity both find

distributive policies more appealing even for a small

amount of resource revenue. Yet, they have an essential

difference. Resource revenue eradicates individuals'

incentive to work in countries with low initial pro-

ductivity while individuals always prefer to work in

highly productive countries.

1|INTRODUCTION

Between 2004 and 2014, while the oil price was rising unrelentingly, many rulers in oil‐and gas‐

rich countries, such as Mahmoud Ahmadinejad (Iran), Hugo Chavez (Venezuela), and Evo

Morales (Bolivia), gained popularity and came to, or stayed in, office by overemphasizing

promises of implementing populist distributive policies. However, following the subsequent

decline in oil price, such policies lost their huge support and tilted toward productive policies.

In Iran, Hassan Rouhani, who promised to revive production units as a presidential candidate,

gained power after Ahmadinejad. In Venezuela too, Maduro, the successor and follower of

Chavez, faced a series of protests blaming his antimarket distributive policies for the country's

severe economic crisis. Individuals seem to become adherents of productive policies when

resource revenue declines.

The simultaneity of resource windfalls and distributive policies, also labeled as petro‐po-

pulism, is mainly addressed in the economic literature from the perspective of rent‐seeking

politicians who use resource revenues to secure political support (e.g., Matsen, Natvik, &

Torvik, 2016; Parenti, 2005). This literature concludes that distributive policies in resource‐rich

countries are the outcome of political competition among populist candidates and, to hold on to

their power, all politicians choose some distributive elements in their policies. This paper puts

forward an alternative explanation for this phenomenon.

Even without the rent‐seeking behavior of politicians, distributive policies may overcome

productive spending with a benevolent policymaker. Indeed, individuals would prefer direct

transfer because of the labor–leisure trade‐off. Besides, unlike the bulk of papers in the eco-

nomic literature, this paper distinguishes between productivity‐enhancing public good and

direct transfer as two forms of public spending. Where resource revenue is high and labor

productivity is low, the gain an individual would get by direct transfer of resource revenue can

be higher than investing the revenue in productivity‐enhancing public good. Consistent with

the experience of many countries with abundant oil and gas reserves, distributive policies are

preferred by individuals when resource revenue is sufficiently high. Low resource revenue, on

the other hand, encourages them to seek more productive policies. The model also shows that

in response to fluctuations in resource revenue, the inherited level of public good in the

economy is a major determinant of individuals' choice between distributive and productive

policies.

I consider a single commodity economy with identical individuals endowed with one

unit of time that can be devoted to either leisure or labor. The economy earns an exogenous

resource revenue that can be distributed as a lump‐sum transfer—distributive policy—or

spent for providing productive public good to increase labor productivity—productive

policy. Government transfers and wages are sources of individuals' income such that the

wage rate increases with productive public good. The paper then investigates the optimal

composition of public spending—transfer versus productive public good—from the per-

spective of the representative agent. At the time of low resource revenues, the im-

plementation of distributive policies provides a small amount of transfer. Subsequently,

wages become the main source of income and wage‐raising productive policies are preferred

by individuals. As the exogenous revenue rises, distributive policies become more desirable

since a larger transfer and consequently a higher level of consumption can be assured. With

a concave utility function in both leisure and consumption, individuals prefer to work less

and enjoy more leisure. A less productive representative agent has a lower incentive to work

and is hence less willing to invest in productive public good. A populist politician, with the

intention of implementing the policy preferred by the individuals, is more likely to directly

transfer the revenue.

More importantly, the inherited amount of productive public good plays a crucial role in

determining the composition of public spending. This, in fact, alters the current productivity

and consequently the current wage income level in the economy. With sufficiently small wage

rates, due to the very low opportunity cost of leisure, individuals are more likely to prefer not to

work and consume the exogenous revenue through transfers. But as the current wage rises, due

to the substitution effect, working becomes more desirable, which then enhances the

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